BIG5D Podcast Episode 19: SmartWage CEO Simon Ellis

"Most people go to payday lenders or loan sharks and it puts them in a cycle that is very difficult to escape."


In its latest episode, the Big5D Podcast features Simon Ellis, the Co-founder and CEO of SmartWage. We asked Simon detailed questions about his company, which fits broadly into the financial inclusion space.

SmartWage was founded in 2019 as an earned wage access platform for South African employers and workers. Essentially it allows workers to tap into wages they have already earned for a small fee, which is either paid by them or their employer.

Why is this important? Far too many South African workers run out of money before their next payday. This is most acute for those on a 30-day pay cycle.

This state of affairs impacts employers by contributing to absenteeism. Money for transport is a leading reason workers need early access to wages.

And this harms workers for many obvious reasons, not least of which is they are often forced to resort to usurious payday lending to get by, absent a more benign alternative like EWA.

“We estimate we're saving employees about 300 Rand per month that they would have alternatively spent on payday lenders,” Simon told us.

One of many challenges Ellis faces is convincing employers to pay for the service, rather than allowing employees to bear the full cost, which, while much lower than payday lending, is a cost all the same.

Probably the biggest competitive threats SmartWage and other earned wage access players face is from the big third-party payroll providers like Sage, ADP, and others.

Ellis acknowledged this but is confident that it does not fit into their business model. He believes that if a payroll player were to enter the space, it would likely be through acquiring a company like SmartWage, or a competitor like Floatpays.

Ellis said SmartWage needs more capital to scale and is in the process of raising a debt fund so it can handle a growing volume of wage advances as it grows.

The company’s future involves penetrating deeper into the market and expanding its set of solutions by adding on features like insurance, savings products, and the like. International expansion is likely farther down the road.

Watch the full episode on YouTube

Here are some key passages from this episode.

Why is this such an important service in South Africa?

“Financial Inclusion is something governments talk about. It's something a lot of fintechs are trying to solve. There is a booming payday lending industry [in South Africa] and we've all heard the horror stories about what people get charged. And the reason why that industry exists is because the 30 day pay cycle hasn't been challenged for 100 years.

“There's a large part of the market which is underserved. So halfway through the month, they need money. Most people go to payday lenders or loan sharks and it puts them in a cycle that is very difficult to escape.”

Who pays for the earned wage access service?

“It's either the employer or the employee. If it's an employee that pays typically, and it's across the board, all of the wage access providers are about five to 10 times cheaper than a regulated, payday loan alternative. And a whole lot cheaper than unregulated alternatives. And typically, the progressive innovative employers who understand the benefits that this gives an employee end up paying for the solution themselves.

“We offer two models. A subscription model is 30 Rand per registered employee per month, with unlimited transactions and a minimum amount of 100 Rand. And we cap the amount that you can access at 25% of what you've actually earned. So if you work for five days, you've only earned five days of earnings. And the other model is a 3% transaction fee.”

What are the benefits to the employer?

“Stressed employees, financially or otherwise, are not productive. So if we can reduce that stress, obviously, there's a benefit for the employer…But the big one in South Africa for the target market we're going after [hospitality, retail, mining] is absenteeism. The number one cause of absenteeism in South Africa is no money for transport. And this solves that problem. And so we've started to see a significant increase in the reduction in absenteeism at the employers we’re working with.”

Why don’t the big payroll platforms take this on?

“I think it's a fundamental pivot to their business model. They typically have these consultants who go and find business and work with businesses too. And now they've got to go a whole further layer deeper to get to the employee. It's a completely different model that would require either that they acquire someone and plug it in, or build their own system.

“And it is nuanced. There are a lot of small things, especially in a South African context that I think the big players are too slow to move to. If you look at someone in the States, like Gusto. This is probably the best example of a payroll provider that has now moved into the space. But they are one of the most innovative companies in America. And it's taken them a couple of years to get to this point. Whereas it's been around for eight or nine years. So I don't foresee the biggest payroll providers making a big change to this.”

What are the biggest challenges facing startups in South Africa today?

“Having lived in London for for a couple of years, the difference in access to capital is significant. For most entrepreneurs finding the right investors is probably the biggest hurdle. Investors want to take a big chunk early on at very low valuations, which then disincentivizes the founders. So that’s the first one.

The second one is talent. With the advent of with with COVID, a lot of talent is now being poached by international companies, especially in the development teams. They can pay double what we can, so we lose out on a lot of significant talent.”